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Ex-Covid core growth intact; eyes on US launches…

About the stock: Cipla is a global pharma company with over 1,500+ products in 65 therapeutic categories, with over 50 dosage forms.

* Indian branded formulations business accounts for ~45% of revenues and enjoys leadership in therapies like respiratory, anti-infective, cardiac, gynaecology & gastro-intestinal

* Cipla derives 20% of its export revenues from the US followed by 12% from South Africa, 18% from RoW markets and 3% from APIs

Q2FY23 Results: Cipla reported strong results in line with our estimates.

* Revenues up 5.6% YoY to | 5828.5 crore (ex-Covid 12%) driven by traction in core portfolio across therapies in India and launch of gRevlimid in the US

* EBITDA margins up 12 bps YoY to 22.3% (24% adjusted for Covid inventory)

* Adjusted PAT increased 10.5% YoY to | 786 crore

What should investors do? Cipla’s share price has grown ~2.5x in past three years

* We maintain BUY due to 1) continued focus on its core strength of respiratory franchise, along with other niche launches in the US (significant momentum expected from H2FY23), 2) calibrated focus on core therapies in India and 3) shift to private markets from tenderised models in other export markets

Target Price and Valuation: Valued at | 1350 i.e. 26x P/E on FY24E EPS of | 50.6 + | 31 NPV for gRevlimid.

Key triggers for future price performance:

* US: Significant momentum from H2FY23 onwards in the US on the back of possible approvals/ launches of gAdvair, gAbraxane and other complex generics launches including peptides, traction from existing respiratory portfolio and g Revlimid

* One-India: Branded prescription portfolio therapy mix reflects strong fundamentals across chronic and acute segments. Better execution and distribution synergies to drive prescription, trade generics, consumer health

* Exports: Across the board transformation from tenderised model to private model in exports market and more focus towards DTM and new frontier markets for organic growth in Europe and Emerging markets

Alternate Stock Idea: Apart from Cipla, in healthcare coverage we like Sun Pharma.

* Higher contribution from specialty and strong domestic franchise is likely to change the product mix towards more remunerative business

* BUY with a target price of | 1225

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